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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 7 posts from March 2009.

Court of Chancey Explains Class Release Rules

In re Countrywide Corporation Shareholders Litigation, C.A. No. 3464-VCN (Del. Ch. March 31, 2009)

This decision provides an excellent outline of what claims may be released in a class action settlement. Here the objectors to the settlement had a damage claim unique to them but that the proposed settlement would have released. The Court held that the objectors needed to be given the right to opt out of the settlement or the release that was part of the settlement must be more limited so as to not affect their rights in their individual claim.

Delaware Supreme Court Limits Revlon and Defines Good Faith, Again

Posted In M&A

Lyondell Chemical Company v. Ryan, C.A. 401, 2008 (Del Sup March 25, 2009)

In this expected reversal of a decision by the Court of Chancery, the Supreme Court has again defined what constitutes "bad faith." The reversal was expected because of the unusual action of the Supreme Court in taking an interlocutory appeal from a decision denying summary judgment . The trial court's decision was considered controversial by some, although the critics exaggerated its significance, as the trial court itself explained when it had refused to certify the appeal.

First, the Supreme Court decided that Revlon duties did not come into play when the Board had rejected a merger proposal. No surprise there, and this is largely a technical point.

Second, the Court repeated, more forcefully than in the past, that only when a disinterested board "knowingly and completely failed to undertake their responsibilities" will it be said to act in bad faith. This means that grossly negligent conduct is not bad faith when there is no scienter involved.

Most significantly, in this case there was no real evidence that the Board knew what it was doing was wrong. It had competent legal and financial advisers, the merger price was a good one, and a "fiduciary out" clause permitted at least some possibility of a competing offer.

Saint Louis University law professor Matt Bodie offers an interesting view on the decision over at the PrawfsBlawg.

Court of Chancery Limits Use of Interested Directors' Votes

Sutherland v. Sutherland, C.A. No. 2399-VCL (Del. Ch. March 23, 2009)

This decision is a good outline of the effect of Section 144 of the Delaware General Corporation Law ("DGCL") that permits transactions to be judged on their merits, even if they are with interested directors. After explaining that law, the Court went on to hold that a certificate of incorporation provision that permitted interested directors' votes to be used to invoke the business judgment rule would be in violation of the DGCL and, thus, invalid.

This is important, because it means that, at least in a Delaware corporation, there are limits on what exculpation can be provided to directors in a certificate of incorporation. The law may well be different in an LLC or LP, of course.

Court of Chancery Explains Scope of Exculpation Clause

Addy v. Piedmonte, C.A. 3571-VCP (Del. Ch. March 18, 2009)

It is now common to include a clause in contracts asserting that a buyer has not relied on anything she was told and instead has only relied on her own investigation and the promises contained in her written contract. Sellers then seek to defeat fraud claims by arguing that the buyer is barred from showing reliance on anything not exactly in the contract between the parties. Courts do enforce these provisions as they have a legitimate place in private ordering.

Here, the Court explains the limits of these exculpation clauses. Even sophisticated parties dealing with a purely commercial matter with the time to investigate may be able to state a claim for fraud despite such an exculpation clause. Briefly, it depends on how bad the lying seems to the court. This case reeks of a scheme to defraud an investor, and the Court was concerned that it would further the scheme if it dismissed the claim because of the exculpation clause. Note, however, that the plaintiff still has to prove he relied on what he claims was a false statement in the face of language in the contract that he was not relying on matters outside the contract itself. Somehow it seems, if he got past the motion to dismiss, he has a good shot at prevailing.

District Court Denies Partial Summary Judgment on Breach of Implied Covenant of Good Faith and Fair Dealing Claim

Zwanenberg Food Group (USA) Inc. v. Tyson Refrigerated Processed Meats, Inc., Civ. No. 08-329-LPS (D. Del. Feb. 27, 2009).

United States Magistrate Judge Leonard P. Stark denied Tyson Refrigerated Processed Meats, Inc.’s (“Tyson”) motion for partial summary judgment of Zwanenberg Food Group (USA) Inc.’s (“ZFG”) contract-based claim that Tyson breached the implied covenant of good faith and fair dealing.

Both Tyson and ZFG are producers and manufacturers of canned meats and other food products. Pursuant to the contract at issue, ZFG purchased from Tyson inventory and equipment used to manufacture canned luncheon meat for private label customers. Wal-Mart Stores, Inc. (“Wal-Mart”) was Tyson’s largest customer for the goods it produced using the assets that were sold to ZFG. Tyson and ZFG, without the involvement of Wal-Mart, executed an Asset Purchase Agreement (“APA”) and the deal closed. More ›

Court of Chancery Awards Fees Based on Intangible Benefit

Posted In Case Summaries

In re Yahoo! Shareholders Litigation, C.A. 3561-CC (Del. Ch. Mar. 6, 2009)

This is another in a line of cases where substantial attorney fees ($8,400,000) are awarded to a stockholder whose complaint achieves an intangible benefit for the corporation. Here the benefit was the end of Yahoo's employee severance plan that made it harder to sell Yahoo.

Court of Chancery Denies Buy Out Claim Based on Change of Control

BASF Corp. v. POSM II Properties Partnership L.P., C.A. 3608-VCS (Del. Ch. Mar. 3, 2009)

The plaintiff in this case argued it was entitled to be bought out of the partnership because the partnership agreement provided buy out rights when control of the partnership changed. The Court held that a change in ownership of the partnership managing entity was not a change in control of the partnership itself. Instead, only control of the manager had changed.